securities law: an overview
Securities law exists because of unique informational needs of investors. Securities are not inherently valuable; their worth comes only from the claims they entitle their owner to make upon the assets and earnings of the issuer or the voting power that accompanies such claims. The value of securities depends on the issuer's financial condition, products and markets, management, and the competitive and regulatory climate. Securities laws and regulations aim at ensuring that investors receive accurate and necessary information regarding the type and value of the interest under consideration for purchase.
Securities exist in the form of notes, stocks, treasury stocks, bonds, certificates of interest or participation in profit sharing agreements, collateral trust certificates, preorganization certificates or subscriptions, transferable shares, investment contracts, voting trust certificates, certificates of deposit for a security, and a fractional undivided interest in gas, oil, or other mineral rights. Certain types of notes, such as a note secured by a home mortgage or a note secured by accounts receivable or other business assets, are not securities.
The Setting for Buying and Trading
Two principle settings for buying and selling securities exist - issuer transactions and trading transactions. On the one hand, issuer transactions are the means by which businesses raise capital. These transactions involve the sale of securities by the issuer to investors. On the other hand, trading transactions refers to the purchasing and selling of outstanding securities among investors. Investors trade outstanding securities through securities markets that can be either stock exchanges or "over-the-counter."
Stock exchanges provide a place, rules, and procedures for buying and selling securities, and the government heavily regulates them. Generally, to have their securities sold and bought on a stock exchange, a company must list its securities on a given exchange. The Securities and Exchange Commission (SEC) must approve the stock exchange's rules before they take effect.
Transactions that do not take place on a stock exchange occur in the the residual securities market, known as the over-the-counter market. Only dealers and brokers registered with the SEC may engage in securities business both on stock exchanges and in over-the-counter markets. Most of the broker-dealers serving the public used to be members of the National Association of Securities Dealers (NASD), which served the NASDAQ stock market, but in 2007, the NASD merged with the dealers from the New York Stock Exchange to form the Financial Industry Regulatory Authority (FINRA) a national securities association registered with SEC. See self-regulatory organization.
Securities regulations focus mainly on the market for common stocks. Both federal and state laws regulate securities. On the heels of the Great Depression, Congress enacted the first of the federal securities laws, the Federal Securities Act of 1933, which regulates the public offering and sale of securities in interstate commerce. This Act also prohibits the offer or sale of a security not registered with the Securities Exchange Commission and requires the disclosure of certain information to the prospective securities' purchaser.
Then, needing an agency to enforce those regulations, Congress established the Securities Exchange Act of 1934, which created the SEC. Since then, Congress has charged the SEC with administering federal securities laws. The 1933 Act's registration requirements aimed to enable purchasers to make reasoned decisions by requiring companies to provide reliable information.
The Securities Exchange Act of 1934 also regulates officers, directors, and principal share holders in an attempt to maintain fair and honest markets. The Act requires that issuers, subject to certain exemptions, register with the SEC if they want to have their securities traded on a national exchange. Issuers of securities registered under the 1934 Act must file various reports with the SEC in order to provide the public with adequate information about companies with publicly traded stocks. The 1934 Act also regulates proxy solicitation and requires that certain information be given to a corporation's shareholders as a prerequisite to soliciting votes. The 1934 Act permits the SEC to promulgate rules and regulations to protect the public and investors by prohibiting manipulative and deceptive devices and contrivances via the mail system or other means of interstate commerce. Section 10(b) deals with trading fraud, and section 10(b)-5 protects against insider trading. Under 10(b), non-government plaintiffs can bring a private cause of action against perpetrators of securities fraud that directly caused the plaintiff financial injury.
The U.S. Supreme Court recently expounded on 10(b) in a pair of cases. In 2007 Tellabs, Inc. v. Makor Issues & Rights, LTD (06-484) determined the requisite specificity when alleging fraud. With Congress requiring enough facts from which "to draw a strong inference that the defendant acted with the required state of mind," the Supreme Court determined that a "strong inference" means a showing of "cogent and compelling evidence." In the 2007-2008 term, the Supreme Court determined that 10(b) does not provide non-government plaintiffs with a private cause of action against aiders and abettors in securities fraud cases, either explicitly or implicitly. See Stoneridge v. Scientific-Atlanta (06-43) (2008).
Certain activities that fall within the scope of the SEA also fall within the scope of antitrust law. These activities have traditionally received exemptions from antitrust law. The U.S. Supreme Court took up this very issue in 2007 in Credit Suisse Securities (USA) v. Billing (05-1157). The Court decided that if securities regulation and antitrust law are incompatible, then the securities regulation prevails and individuals who would otherwise violate antitrust law receive antitrust immunity. Determining incompatibility requires the presence of the following four criteria: 1) behavior squarely within securities regulation; 2) clear and adequate SEC authority to regulate; 3) active and ongoing SEC regulation; and 4) a serious conflict between regulatory and antitrust regimes.
State securities laws are commonly known as Blue Sky Laws. Typical provisions include prohibitions against fraud in the sale of securities, registration requirements for brokers and dealers, registration requirements for securities to be sold within the state, remedial sanctions and civil liability. A majority of states have adopted at least part of the Uniform Securities Act, although notably California and New York have not done so.
menu of sources
U.S. Constitution and Federal Statutes
- U.S. Code:
- CRS Annotated Constitution
- Title 17 C.F.R., Chapt. II - Securities and Exchange Commission
Federal Judicial Decisions
- U.S. Supreme Court:
- U.S. Circuit Courts of Appeals: Recent Securities Decisions
State Judicial Decisions
- N.Y. Court of Appeals:
- Appellate Decisions from Other States
Key Internet Sources
- Cornell Law School Securities Law Clinic
- Corporate Information from SEC Filings (EDGAR)
- Financial Industry Regulatory Authority (FINRA)
- Stock Valuation:
- Federal Agencies:
UsefulOffnet (or Subscription - $) Sources
- Good Starting Point in Print: Thomas Lee Hazen, Hornbook on the Law of Securities Regulation, West Group, 5th ed. (2007)
- LII Downloads